How to handle debt in retirement and stay smart with your super

Debt doesn't disappear just because you've retired! We take a look at some of the ways you can tackle it alongside your super.

If you've got debt and retirement is approaching, first of all, don't panic. Nowadays, it's perfectly normal to retire with some debt, like a mortgage or personal loan.

We're looking at some of the things you need to know for balancing your super with debt at retirement.

You don't have to take your super all at once

A lot of people think that they have to take all of their superannuation as a lump sum.

But that's not the case at all, because you have options, like:

• a lump sum
• an income stream
• a combination of both.

There can be potential tax benefits to choosing a partial withdrawal, rather than needing to pay tax on a lump sum.

A partial withdrawal can also give you some stability in the moment, as well as income further down the track.

Ultimately, it's a question of balancing your cash flow, preferred retirement lifestyle and debt.

Of course, everyone's circumstances are different. What's right for you might not be for someone else, and vice versa.

So it's definitely worth consulting with a financial professional in the lead-up to retirement.

How debt changes retirement decisions

When you retire, it can be very tempting to pay off any outstanding debt that you have. And if you've got a relatively small amount of debt, then it's entirely understandable!

But this isn't always the case, particularly if it's large debt, like a home loan.

Let's use a mortgage as an example.

It's not uncommon to retire with a mortgage in this day and age.

But it doesn't necessarily mean you should funnel all your super into paying off your home loan straight away.

Your super needs to be used for all aspects of your retirement, not just for paying off your home loan.

Although it's understandable to want to be debt-free straight away, choosing to pay your home loan off immediately could backfire.

Depending on how much you still owe, it can use a significant chunk of your retirement funds.

That means you may end up debt-free, but you might not have much cash flow.

Further down the line, this can potentially interfere with your other plans, like travel or renovations.

Interest is also a factor when deciding to pay down debt with your super. You should weigh up:

• The interest you'd be paying to keep the home loan for longer.
• The potential returns you could generate via investment in your super fund.

Options when retiring with debt

Paying off your debt in retirement isn't a one-size-fits-all situation. So the way you set up your funds pre- and post-retirement can make a significant difference.

A number of these options can also work alongside the Age Pension. However, you'll need to consult with a professional to see whether this will apply to your situation.

Withdraw what you need

Some people have very specific goals for their retirement, and might choose to withdraw a lump sum. This may include paying off debt, but it can also include big-ticket purchases (like a camper van), investments, or financial gifts to other family members.

This is arguably the highest-risk option, as not everyone is well-equipped to handle large sums of money. Debt may be paid off, but longer-term benefits may be missed.

Keeping a balance invested in a retirement income account

A retirement income account pays you a regular income by using your super. You also choose an investment option for your balance, so you can generate returns over time and (ideally) keep it topped up.

For some, this option can provide easier access to your money, without some of the risks that could come with managing large lump sums.

Transition to retirement strategy

A transition to retirement account allows you to access some of your super while you're still working. You can do this before you turn 65, and it can be a way to help pay off outstanding debt you might have before retiring.

As you're still working, your employer will still pay your super. This can have tax implications, so it's worth speaking to a financial adviser before locking in this approach.

Partial withdrawal and retirement income stream

Some people might choose to withdraw an initial lump sum and transition the rest of their money into a retirement income account. As mentioned above, a retirement income account could offer certain tax benefits. However, this should always be discussed with a financial adviser first.

Get financial advice

Last, but absolutely not least, consider getting financial advice if you're likely to retire with debt.

You could access professional financial advice through your super fund either as part of your membership or for an additional fee.

For example, Aware Super members can book a check-in with a super or retirement expert at no additional cost. You may still decide to engage an external financial advisor, but you'll also have information handy before needing to pay full fees.

Remember: the rules surrounding retirement and finances are complex. It's helpful to get an impartial view when you're weighing up your options.

A financial advisor will have up-to-date knowledge of legislation, and also be able to look at which options would best suit your own circumstances.

Download Aware Super's financial action plan and get a head start on your retirement today

General advice only. Consider your objectives, financial situation or needs, which have not been accounted for in this information and read the relevant PDS and TMD before deciding to acquire, or continue to hold, any financial product.

Sponsored by Aware Super Pty Ltd (ABN 11 118 202 672, AFSL 293340), trustee of Aware Super (ABN 53 226 460 365).